Negative Gearing Can Be Like Treading Water

I assume you said this in jest.

 

I find it so hard to predict CG I just have to only rely cf+ (taking into account all costs, principal , tax and capX).
The cf actually gets worse the more debt is repaid (until the whole loan is repaid) as the tax bill rises (less deductible interest) but the mortgage remains the same

 

Not jesting

 

Have you got any numbers to demonstrate, because I cant quite follow your reasoning? Surely as you pay off debt your cashflow improves even as your tax benefits are reduced?

 

I am genuinely interested (and a bit shocked).

Can you please explain why you NEVER ever rely on graphs they will NEVER give you a true indication what is happening on the ground?

PS
I am a graph nut!!!

 

Sure...it is because the mortgage payment remains fixed but the interest content reduces...hence deducability is reduced (along with tax depreciation reducing) ...so income tax increases
...you have to fully pay the loan off (or rents increase or principal stay fixed or decreases) before cf increases.
Profitability and tax are rocketting up along with principal but cf is poor.
When my debt is fully paid off the cf will be amazing even without rental growth ..

 

@kierank I gotta admit mate, similar to @MTR, I am not a graph person. Never have been. I look at the usual stats like Supply and Demand, SOM, Discounting %, rental vacancy, CG history etc but not into graphs. My mind doesn't work that way. I am a lot more interested in qualitative data eg what my close peers are saying, on the ground info, info by on the ground players, gauging market sentiment, looking at value areas by suburb comparisons, sale values. etc. Just never used graphs much...if ever. Not knocking them, just not my thing.

 

I am the opposite. I love to plot everything.

I give you an example. When we bought our last property, a sky home in February 2016, I researched and obtain the current estimate, the last sale price and last sale date for all 24 sky homes in the complex.

When I looked at the raw data, it looked like a bunch of numbers.

But when I plotted current estimate vs last sale price sorted by sale date and then by sky home number (floor number), I got some insights into the data.

I used these graphs to help formulate my initial offer and my top offer. I went into the negotiations with confidence.

So, I like to use quantitative data (which I prefer see in a graph) and qualitative data.

But, I have to agree that, if the raw data is ******** and one graphs it, then it is still ******** (only now you have a pretty picture of the ********) .

 

Ahh got ya, your including principle payments into the cashflow calcs. Thanks for clearing that up.. I knew I was missing something

 

Because graphs paint a picture of what happened in the past. Lagging indicator

Often on here you will read stuff about particular areas where you know the market pretty well and the poster will either boo hoo or talk up an area based on some past trends.
Could be totally opposite to what was actually occuring at the time

 

I know people love charts, not me.

Charts are way too broad, stats include everything and then average it out, charts wont give a clear/true indication on what is really happening on the ground. I just proved it

Have a look at Big Wills chart above on Melb market, the chart does not reflect what actually happened on the ground in 2008-2009, Melbourne was a booming market, I was playing in this market, I know for a fact that we were seeing 40% gains within 2 year period with some of my properties, I purchased 5. One went to auction purchased at 500K sold 2 years later for 700K, Coburg, you wont see this in any charts.

The best way to find out what is happening is to phone re agents and check the volume, supply vs demand, how quickly they are selling and if there are multiple offers.

 

Hey, can you tell me what indicator isn't lagging? Perhaps crystal ball sales

OMG - of course graphs paint a picture of what happened! Doh. And of course we use previous information to base decision on the future. Doh. It's called being alive and reasoning (homo sapiens).
The graphs are just a way of visualing data. Some people don't get it/need it, but think of how many people (kids in schools) suddenly see the compounding curve and the lightbuld goes off! Looking at the underlying data? Bleh. Seeing that curve - aha!

 

Negative gearing will only get you so far. Once your portfolio becomes substantial you will need to change the NG is king concept.

 

My principle is I do want to reduce debt to reduce risk so I do (and now forced to) pay principal!

 

Disclosure: I am an FP, no advice.

Negative gearing is simply a term for making a cash flow loss on an asset you borrowed for. It's certainly not all it's hyped up to be as in reality it is punting on the hope that capital growth will outstrip the annual loss. A lot of people equate negative gearing with property investing but they are 2 totally separate topics.

Once you realise that gearing strategies pave the accelerated road to wealth but require a sophisticated approach it's time to take a serious look at debt recycling. I am talking about a correctly set up debt recycling structure that allows you to actively and dynamically pursue the strategy. It MUST be underpinned by a detailed future cash flow map and deep appreciation for the disciplined cash flow management that is absolutely necessary for DR to succeed. I have over 12 years experience in advising people on debt recycling strategies and I can safely say that for anyone with a goal to get rid of a sizeable non-deductible debt and create additional wealth this is hands down the number one strategy.

It's worth noting that debt recycling can not be done correctly using only property for the investment assets, anyone who thinks this is the road to debt recycling has a very limited understanding of the strategy and why it works. it is also a strategy where you do NOT need to focus on investment returns or heavy involvement in investment decisions and strategies. The only focus needed once the structure is correctly established is to follow the future cash flow map correctly.

 

Your graph looks like QLD vs NSW, see graphs can work!

 

Mmmm, but I don't need a chart to work out compounding effect.

... and I wont find a booming market using a chart, its just a guide, same as medians, if this were true and charts were perfect then investors would have all jumped into Syd and Melb market, check out threads on Bris and Adelaide....??? What did they miss in 2013

 

You don't, but there's proof that many people do like pictures of things - like Google , but they're only the latest example of a looooong line.

Of course people can find a booming market using visualisation of numbers. You may not be able to, but many others can and do - e.g. probably Ripehouse's entire customer base (probably >0 ). Of course numbers don't find anything or tell you anything - there's no mouth (except perhaps for zero ). Same for diagrams/graphs - they don't "tell" you anything. But I can tell you from a career in research, there's nothing - absolutely nothing - like diagrams and graphs for humans to try and make sense of (whatever that means!) and draw conclusions from lots of data.
The link to Syd/Melb doesn't make sense - the graphs were/are being interpreted by people. Some of they look and have looked and will jump into Syd/Melb. Others go "look how expensive it is - I can't afford it - and how the money has already been made, I'll go elsewhere". Both are sensible in that the people are interpreting what's available to them.

 

Yes, all the gurus, who seem to get predictions wrong

Seriously though, one indicator is to look at auction clearance for starters and booms are all about supply vs demand, this information is easy to obtain, networking is key IMO.

Most important factor is to get in early, when you say Sydney expensive today?? Perhaps? Perhaps not.
My logic for not buying now would be that the market has been booming since 2013, how long do markets boom on average and what are the drivers for it to continue to boom or correct and is market sentiment changing? I cant get any of this information from a chart, but if it works successfully for others great.

All to their own

MTR:

 

Hi Marisa,

Yes, this is correct. I bought IP's in 2007 in inner Melb. They experienced growth almost immediately. The 'mini boom' I think we called it at the time then radiated outwards. There were a core of us on SS who were in the thick of it. Jit and a couple of others too.....

Was a very exciting time for those holding IP's in Melb! Not only this, I think this was the first time I experienced first hand the benefits of operating a property portfolio - from using equity to fund further deposits, release titles from banks and provide a myriad of financing options. Was a real eye opener.

Kind regards

Jason.